In the Region / Westchester; Office Vacancy Rate Is Continuing to Inch Up

By MARY McALEER VIZARD

Published: October 18, 1998

AFTER a mid-decade high of 25 percent, office vacancy rates in the county have, for the most part, been declining, hitting a low of 16.8 percent at the end of last year. Since then, however, rates have been inching back up again, leading some brokers to speculate that global economic strains may finally have caught up with Westchester's market.

Third-quarter reports show vacancy rates either stagnant or inching up slightly, which some predict could be a continuing trend.

''All of us probably need to sit and take stock of how the stock market will affect occupancy,'' said Michael Siegel, an executive director with Insignia/ESG's Stamford office. ''It's going to have an impact on Westchester's companies.'' He pointed out that many were multinational firms, some of which, such as Pepsico, Texaco and I.B.M., have their worldwide headquarters in Westchester.

According to CB Richard Ellis, the commercial brokerage, the county had an 18.4 percent vacancy in the third quarter, compared with 17.2 percent at the same time last year. Using different criteria, Insignia/ ESG and Cushman & Wakefield, calculated rates of 16.6 and 15.8 percent, respectively, in the third quarter this year, both higher than the previous quarter, but about the same as the third quarter of last year.

''I expect we're probably going to be status quo for a while,'' Mr. Siegel said, ''which is not good. We'll probably have no earth-shattering news, no rocket announcements, but I.B.M. may return another property or two and Oxford Health Plans may also give back more space.''

In the third quarter, Cushman & Wakefield reported a negative absorption of 385,444 square feet, meaning that much space had been vacated and returned to the market. Last year at this time, it reported positive absorption of 557,112 square feet, meaning that much space had been occupied and taken off the market.

''The negative absorption represents, in large part, the return of the former Kraft headquarters, with 605,000 square feet, to the market,'' said Maureen O'Boyle, a director with Cushman & Wakefield's Stamford office. Last April, Cohen Brothers Realty Corporation, of Manhattan, purchased the former headquarters, in White Plains. And they recently announced that Philip Johnson had been hired to reconfigure the 41-year-old building for today's market.

The county has begun attracting other Manhattan developers, who, faced with a scarcity of available properties in the city, turn to the suburbs in search of development or redevelopment opportunities. One of the most ambitious projects is being undertaken by Tishman Speyer Properties, which plans to redevelop the site of the former Macy's in downtown While Plains.

While the company has not yet formally presented its proposal to the city, it has announced plans to build 540,000 square feet of retail/entertainment and restaurant space on the Macy's site and surrounding properties. The project may also include 450 units of rental housing and 2,350 parking spaces, the developer has said.

ANOTHER Manhattan developer, the Witkoff Group, paid $65 million last month for Pepsi-Cola's headquarters building in Somers. The 522,800-square-foot building sits on a 206-acre campus and there is expansion potential for 640,000 additional square feet of office space, said Steven Witkoff, principal of the Witkoff Group.

''It was a great deal for us,'' said Mr. Witkoff. ''We got it at 40 percent replacement value.'' Pepsi-Cola will lease back the space for five years, according to Ms. O'Boyle, who represented Pepsi-Cola on behalf of Cushman & Wakefield.

''Without that lease we wouldn't have done the deal,'' Mr. Witkoff said. ''We needed that guarantee to give us time to find other tenants.''

In addition, Mr. Witkoff said, ''we plan to amortize our investment, which should, by the expiration of the lease, bring our cost down to around $80 a square foot.''

''That means,'' he added, ''that we could afford to rent space for $14 to $15 a square foot.'' Average rents in the county are now in the low to mid $20's. ''If the market can support rents in the $25 to $28 range in five years, we'll have hit a home run,'' Mr. Witkoff said.

The Somers deal was Witkoff's first purchase in the county. ''We're not looking for other opportunities in Westchester now,'' Mr. Witkoff said. ''This was a unique deal and property.''

The company operates over 11 million square feet of commercial and retail real estate. It also has an ownership interest in 7,500 apartments and various land and hotel development transactions.

Over the last three years, Witkoff has acquired a total of 27 office buildings nationwide, 17 of them in Manhattan. Before it buys a property, Mr. Witkoff said, the deal has to have certain ingredients. ''We look for steep discounts to replacement costs and limited risk,'' he added.

SUCH outside investment in the county bodes well for the market, according to Frank Tomasulo, an executive vice president with CB Richard Ellis. The two real estate investment trusts that own most of the office space in the county -- Mack-Cali and Reckson Associates Realty Corporation -- have acquired no properties since June, Mr. Tomasulo said, ''so we need these outside investors to improve the health of the office market and make it an attractive alternative to outside companies.''

Toward that end, the county is reopening its Economic Development Office, which had been disbanded in 1995. Its work was taken up by New York State's Empire Development Corporation and such public/private organizations as the Westchester Partnership for Economic Development.

''It had really gotten fragmented,'' said Geoffrey Thompson, spokesman for the Westchester Partnership. ''If someone were interested in moving to the county they would have to talk to 33 people. It was very discouraging.''

Nevertheless, during the time the office was closed, the county succeeded in attracting such high-profile companies as Nine West, the shoe manufacturer, which moved its headquarters to 336,000 square feet inWhite Plains from Stamford, Conn., last year, and Oxford Health Plans, which leased 370,000 square feet in White Plains in 1996. both companies recently vacated 45,000 and 296,032 square feet, respectively.

''Our goal is to coordinate and streamline the process of both helping companies relocate in the county and getting the word out that it's a great location,'' said Robert Elliott, the Mayor of Croton-on-Hudson, who will head up the new office.

The current market conditions could even work in Westchester's favor, Mr. Elliott said. ''For companies that are closely watching their bottom line, they'll see that Westchester is an affordable location compared to Manhattan and Fairfield County,'' he said. ''And now that county is heading up the effort to get the work out, we'll be in a stronger position.''

Photo: The Witkoff Group paid $65 million last month for the 206-acre Pepsi-Cola headquarters in Somers. (Joyce Dopkeen/The New York Times)